Forward Air Corp (Delaware) (FWRD) 2008 Q2 法說會逐字稿

Thank you for joining Forward Air Corporation's second quarter 2008 earnings release conference call. Before we begin, I'd like to point out that both the press release and this call are accessible on the investor relations section of Forward Air's website at www.ForwardAir.com.

With us this morning are Chairman, President and CEO Bruce Campbell, and Senior Vice President and CFO, Rodney Bell. By now you should have received the press release announcing second quarter 2008 results which are furnished to the SEC on Form 8-K and on the wire yesterday after market close. Please be aware this conference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others regarding the Company's expected future financial performance.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing words such as believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors among others set forth in our filings with the Securities and Exchange Commission and in the press release issued yesterday, and consequently actual operations and results may differ materially from the results discussed in the forward-looking statement.

The Company undertakes no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise. Now I will turn the call over to Bruce Campbell, Chairman, President and CEO.

Thank you and good morning, thanks for joining our second quarter earnings call. We're pleased to share with you strong second quarter results in spite of a very challenging environment. I would like to touch on some of the highlights.

Record revenue of $121.6 million, a 30.5% increase over Q2 of '07. Record income from operations of $20.3 million, a 10% increase over Q2 of '07. Finally, record diluted earnings per share of $0.42, also a 10.5% increase over Q2 of '07.

Driving these results was our core operating segment. The airport-to-airport group continued to grow and produce outstanding results, highlighted by an operating ratio for the month of June in the high 70s. Our completing the model strategic initiative continued to perform very well, highlighted by significant growth in both our TLX, a.k.a. Truckload Brokerage Group, and our Forward Air Complete product line. Simply a great job by both of these operating groups.

Forward Air Solutions continued making progress with their most important strategic initiative, growing revenue and expanding their geographic footprint. With the late Q1 acquisition of Pinch Transport, we were able to open Houston and significantly expand our presence in Dallas. Additionally we opened our first de novo terminal in San Antonio, giving us a significant presence in the state of Texas. We now look forward to positive contributions from our Solutions Group for the balance of the year.

One other highlight for the quarter that I would be remiss in not mentioning. Our dedicated group of over 800 professional independent contractors operated millions of miles during the quarter at the highest levels of safety in the history of our company, a truly remarkable achievement. Congratulations and thanks to them and our safety team. Now for the financial results, Rodney Bell, our CFO.

Thank you all for joining us this morning. After my comments we will open the lines for your questions. As Bruce mentioned, total revenue for the first quarter increased 30.5% to a record 121.6 million. Over [50]% of that overall growth came from the Forward Air Inc. operating segment which includes our airport-to-airport business, which grew 15.5%.

The growth we enjoyed in our core airport-to-airport business is attributed to a nearly 14% increase in tonnage, which primarily resulted from Black Hawk and Pinch acquisitions, as well as good organic growth driven by Forward Air Complete. Both acquisitions as well as increased airline business resulted in more short haul traffic, or regional traffic which had a negative impact on our yield. However, yield net of fuel surcharge was slightly positive for the quarter.

Our Logistics group, which is primarily TLX Truckload Brokerage, had another outstanding quarter growing revenues by 45% to over 15.5 million. The 18% growth in other revenue was due to additional service offerings at additional facilities gained through acquisition as well as a better overall job cross-utilizing our existing facilities in order to generate more incremental revenue.

In our Forward Air Solutions operating segment, revenues were 11.4 million against a zero base in Q2 2007. Sequentially Solutions grew 46% from Q1 '08 due to the Pinch acquisition, securing new business, and organic growth driven by seasonality. Overall purchase transportation improved 290 basis points to 39.4% of revenue.

Against increasingly difficult comps, our team provided improved PT in our core airport-to-airport network by 100 basis points. Logistics PT as a percentage of revenue was approximately 72.9%, or 340 basis point improvement versus Q2 '07. This improvement primarily resulted from success recruiting owner operators who exclusively haul TLX loads, allowing us to replace more costly third party miles.

Again this quarter the relatively low PT cost component in our Solutions segment had a slightly positive impact on overall PT, keeping in mind the impact of company-owned vehicles and drivers impact other line items such as salaries, depreciation and fuel.

Salaries, wages and benefits increased 280 basis points from Q2 '07. This increase was partially due to increased share based compensation and increased performance-based incentives. The remaining increase was a result of increased headcount of mainly terminal personnel & company drivers associated with Black Hawk and Pinch acquisitions, as well as relatively higher salaries as a percentage of revenue in our Solutions segment.

Operating leases were up 60 basis points due to leased equipment from our latest acquisition as well as new and upgraded facilities. During the quarter we worked to right size our Solutions fleet by turning in excess leased equipment. Depreciation and amortization increased 60 basis points due to our three acquisitions, third quarter 2007 equipment purchases and depreciation of our new company-owned facility in Atlanta. Insurance and claims declined 70 basis points as a result of an actuarial adjustment, as well as good claims experience in the quarter.

Fuel was up 200 basis points as a result of additional company trucks necessarily to service our pool distribution business, as well as local pickup and delivery needs brought on by our recent acquisitions. Obviously the higher year-over-year cost of diesel also contributed to this increase. Other operating expenses were up 20 basis points. This was due to integration costs associated with Pinch as well as higher repair and maintenance on more company-owned equipment.

Income from operations was up 20.3 million compared to 18.3 million, an increase of 10.6%. Operating income as a percentage of revenue declined 300 basis points. Below the operating income line was nearly a $700,000 swing from interest income to interest expense, which resulted from using available cash from borrowings over the last 12 months to finance share repurchases, our facility in Atlanta and three acquisitions.

Our tax rate increased from 38.8% to 39.5% as tax-free interest income declined and disallowed deductions per share based compensation increased. Net income increased $627,000 to 12.1 million for the quarter, which is an increase of 5.5%, while EPS increased $0.04 per share or 10.5% to $0.42 per share. Year-to-date revenues were up 27% reflecting the benefit of our three acquisitions as well as nice growth from TLX Truckload Brokerage and Forward Air Complete.

For essentially the same reasons cited for the quarter, we operated 280 basis points worse for the first six months of 2008 as compared to 2007. However, operating income exceeded last year by 8.1% and EPS was up 5.6%. Other key information and metrics for the second quarter are as follows. Total assets grew $241 million to $274 million for the year. Cash flow from operations were down $8.1 million to $17.2 million from $25.2 million in Q1 '07 resulting from timing and negative trends in Accounts Receivable which we're in the process of addressing now.

We ended the quarter with $1.6 million of cash and short-term investments and $35 million outstanding on our line of credit compared to $5.4 million and $30 million respectively at year end. No shares of the company's stock were purchased repurchased in the quarter and approximately 1.8 million shares remain on the 2007 repurchase plan.

Average weekly linehaul tonnage increased 13.4%. Average shipment size for Q2, driven in part by an increase in heavier airline shipments, was up 11.4% to 771 pounds per shipment. Shipment count was up approximately 2%, yield net of the benefit of fuel was up 1.9%, and we ended the quarter with 83 airport-to-airport terminals and 14 Forward Air Solutions terminals.

Guidance for the third quarter is as follows. We anticipate revenue coming in between 22% and 27%, while EPS is expected to be between $0.40 and $0.44 per share. That concludes our comments. Now back to the operator for your questions.

(Operator Instructions). Alex Brand, Stephens.

Good morning guys. Rodney, let me just start where you finished up on the yield because let's see -- you said 1.9% positive yield net of fuel.

Correct.

Which surprises me, if you took that much additional airline business and your length of haul is shrinking, that you wouldn't have had a negative yield when I netted out the fuel. Does that make sense, or am I missing something there?

Essentially how the fuel trended over the course of the quarter and how we reimburse our owner operators in rising times, it's -- we get more benefit than when fuel is declining. Does that make sense?

Yes. So should I expect some compression though as that business -- as your shorter haul business grows? Sounds like it's growing the fastest of anything.

You should. The way the fuel worked out for the quarter just more than offset the compression that came with the short haul regional business from the two acquisitions as well as the airlines.

Okay. I don't know if I missed this, but did you say in your 30.5% revenue growth, if I ex-out fuel, how much that accounted for in the topline?

I'm sorry, (indiscernible) I'm going to clarify the 1.9% includes the impact of fuel, right?

Let's start over. You asked what the 1.9%, that includes fuel. Our actual yield declined on an overall basis net of fuel between 5% and 6%.

That makes more sense. That's where I was confused.

That was driven by two factors, and both of them you mentioned. One is we're more heavily involved in the regional short haul type of traffic, a lot of that driven by our Chicago hub opening back in the early part of the year. The second thing that drives that is while we like to have larger shipments and larger shipments tend to indicate maybe the economy is getting a little bit better, larger shipments also drive down your yield.

And what we saw was, as Rodney touched on, larger shipments, and we also saw a little bit of a spike in very large shipments. And we assume that was driven by lack of truckload capacity, especially during the month of June in certain areas. Not across the board but in certain areas. That will drive yield down also.

Overall we're not concerned with our yield. I think we've touched on this before. If we know that yield is being driven down, our net yield is being driven down by a shorter length of haul and by larger shipments. That's okay. We get concerned with yield going down when we move a shipment from Boston to Los Angeles for $0.22 last week and $0.20 this week. That's the problem. So where we fit today was anticipated and we're okay with it.

Bruce, let me segue to your comment on tighter capacity. Can you just talk about -- I guess combination of what you're seeing in the market in terms of available capacity, which is obviously shrinking. I guess I have two questions. Number one, how is that impacting your truck brokerage business, and number two, are you maybe differently positioned in this cycle to take advantage of tighter truck capacity, where maybe in previous cycles that would not have been as much a benefit for you?

To answer your first question, we think -- the TLX group has positioned itself very well from the standpoint of -- they have established relationships with outside carriers. We do not go to an outside carrier and beat the dickens out of them to get a lower price. We would rather establish a longer-term relationship with them, and in some cases if that means a bit higher cost, we're okay with paying that as long as they continue to provide us the capacity that we want.

That is in fact what happened in the second quarter. We did see sporadic shortages of capacity, primarily in certain geographical areas. And we have seen that lesson now, as you might imagine, when we enter into July.

We have done one additional step to help ensure the Company that we always have capacity on that side. And that is the Forward Air model has traditionally attracted owner operators and very good owner operators. We began at -- during January this year after a little test program in the fourth quarter of last year to put our own owner operators into this area of business. Rodney touched on it a bit, that does two things.

One, it guarantees us capacity because they are our owner operator. And do, if they are utilized properly, and that's the challenge that our group has is to utilize them properly, then in fact that cost is much less than using any outside carrier. That's how we have positioned TLX. We feel they're in a strong position today and will continue to be in a strong position as we go forward.

One last question from me and I'll let it go. Rodney, your comments you mentioned the timing of receivables, but I am not accustomed to you guys taking a cash flow hit from working capital like that. Can you just comment on that a little bit more what happened there, and how confident are you guys that that has been addressed?

There are several things driving that. One was some legacy systems from the two most recent acquisitions which we think we've got a handle on that now with our IT group. Also we added horsepower in our credit collections department.

We were caught a little flat footed and understaffed and had some difficulty getting the right people. We have the right people now and -- it is an oddity to see a cash flow hit from AR here, and we're getting that fixed very quickly.

Great, thanks a lot guys.

Jon Langenfeld, Robert W. Baird.

Bruce, when you think about the acquisitions, and primarily with Pinch, maybe it will help us understand the challenges you're facing. If you look backwards and say what would you do differently thus far anyway, what would be your answer to that?

When we purchased Pinch, it was an unusual purchase from the standpoint of -- they participated in all our product lines. And by that I mean they moved airport-to-airport business throughout the state of Texas, similar to what our group does. And then they also had -- the pool distribution product line.

And basically what we had to do is go in, and this was primarily centered around Houston more so than the other operations, although there were some issues in other cities where we had to go in and -- nobody's fault. We simply had to break it apart and focus on the pool business on one side, and on the other side airport-to-airport, get the airport-to-airport merged into our existing network, and to start the efficiencies, the pool distribution side on Houston.

If we had to do it all over again, we probably would have been a bit more aggressive in splitting that apart. I'm trying to be kind here. And in -- getting people focused very quickly on, you no longer have three product lines to worry about. You have one, and we want that one operating. And we want it operating with the Forward Air cost discipline.

Now we didn't do that, I'm starting to get hot thinking about it, and as a result we paid a price. So we have put some very good people in charge down there. We have the product lines completely separated for the time being, and they are standing on their own. And we think good things are going to come out of them. But again, your question was what would we do differently, that's what we would do differently. And I can assure you we will not go through that again.

It's not that big of a hit relative to the big scheme of things, I was just curious.

You're exactly right. But on the other side of that equation, that comment you just made is kind of disappointing. I am disappointed in myself.

But if you think about the future, I know you guys said we're still looking for acquisitions and evaluating them, does it change your selection criteria at all?

No, really not. Pinch was and is a good acquisition. It set our airport-to-airport. It gave us a really good solid presence in the state of Texas. They brought on new customers that we did not have before within our Solutions group. So all of that is very positive.

We just -- you look at things strategically and you have to do that thing called execute. And in this particular case we didn't execute, and at Forward Air we're known for being able to execute. So that was disappointing. That certainly has no impact on future looks or opportunities to expand this product line.

And is it where you want it to be? You probably always want it better, but is it where you think it should be today?

They have made significant progress. Rodney touched on we've turned in a lot of leased equipment that when you put the two operations together became excessive equipment. That's a normal part of an acquisition, we're okay with that. Just getting it done, going through the process, is sometimes more detailed than you would like to have. But overall, they are -- we think we have them positioned well and good things are going to happen there.

And the probability run rate in Solutions, I know it's positive in June, but is it -- did it [uptick under] your expectations in the third quarter?

We hope it will be. (multiple speakers) revenues grow, which is a critical driver for them. They got their cost side of the equation in much better shape than it was. They have a lot of positive customer opportunities going on right now. If all of those things come together, and it doesn't rain on Thursday, we think we're in really good shape.

Any speculation in the quarter collectively how much the three acquisitions added to the earnings line?

For the third quarter?

Second quarter.

Meaning Black Hawk, Pinch and USA?

Yes.

That would be hard. You're jumping across product lines, and some of it is almost impossible to delineate.

Fair enough.

We're very happy. We have no regrets with any of the acquisitions.

Maybe to ask differently, would you think earnings would be growing if you didn't do these acquisitions?

Not to the degree that they are today, but I would go back and tell you also, we're jumping from fence to fence here, and let me explain that. Our core business, the airport-to-airport was helped by Black Hawk in particular. But they have also done a really good job.

So on one hand we want to say acquisitions really helped us and have helped our earnings can and we know to know that's the case. On the other hand I don't want to overlook what has really been a terrific -- job by our existing business owners, if you will. They've really done a nice job in some very difficult situations. We're most pleased on both counts.

That's a good answer. On actuarial adjustment, can you talk magnitude and -- assuming that's your normal -- your true up?

It was $300,000, call it a $0.005.

And that was in Solutions, I'm assuming?

That was in Forward Air proper.

So why in Solutions is your insurance and claims zero for the quarter? (multiple speakers)

Truing up there too.

How much was that?

It was less than $100,000.

And then the expense lines on the Solutions, where the cost would show up would be what? I'm assuming some of that is in the leases and some of it is in other?

It would probably be just about across the board.

It would be? Okay. I know that's going to bounce around a little bit here -- okay. And then the fuel side of the equation, I know roughly neutral to Forward Air in general. But when fuel goes up, is that more neutral than when it goes down? Let's put it that way, in terms of how everything shakes out with the surcharges?

When fuel goes up it's more negative to us, although not as bad as it has been in the past because we now adjust on a weekly basis. When fuel goes down it's more positive to us, although not as positive as in the past for the same reason.

And when did you make the change on --

The first week of May.

Previously it was monthly?

Correct.

And last question, on the owner operators, the sequential improvement in owner operators, and you mentioned this in your comments, but did most of those go to the TLX side or linehaul or how do you look at?

A little bit of both. We've actually been recruiting more teams to the airport-to-airport segment, and more single drivers to the TLX segment. In general, that's a true statement.

Nice quarter, thanks.

David Ross, Stifel Nicolaus.

Good morning. A question first about airport-to-airport operations. On last quarter's conference call you gave guidance of 1% to 2% organic growth in that business. I just wanted to see where that actually fell out in the quarter. Was that roughly in line with what you were expecting, or a little bit better?

That was somewhat a [gas where] we continue because of the blending of the acquisition business with the organic business. But using our same method of extrapolating, we think that's slightly higher, probably 2% to 3%.

And with the high fuel prices recently, there has been a lot of talk especially the bigger players about trade down in services from air to ground. And as a large deferred air freight carrier, I assume you guys are benefiting from that. But I also wanted to know on the Forward Air side, are the air freight carriers giving discounted rates because they have excess capacity these days? And how is that I guess affecting the competitive environment for deferred air freight?

I think answer to the first portion of your question is that's been going on -- the trade down as you termed it has been going on for a number of years, perhaps exacerbated by the fuel. But we don't see anything unusual in that area. It's almost the norm anymore.

One of the things we say to people all-time is if a company has product, and they have a good logistics supply chain software system, they're not going to put it in the air to begin with because they just can't justify the cost, and they have the ability to plan beyond that. So we haven't seen a whole lot of change there.

As far as the airlines offering discounted rates, we see that on occasion primarily on the weekends, but most of that has gone away because there are no wide bodies left in domestic groups, were very few white market wide bodies. So you don't see -- when we talk to airlines, in general what they sell is international freight, not a Boston to Cincinnati. There are exceptions to that, obviously, but their goal in life is to improve their international. So you just don't see a whole lot of activity in the domestic market from the airlines, although there is some, and especially again as I said earlier, on the weekends.

And on the pool distribution side, I believe you're about two-thirds of the way towards your national footprint, which is the goal, you said you wanted to digest fully the Pinch and Black Hawk acquisitions before you really look to complete that footprint. Are the Black Hawk and Pinch acquisitions fully digested right now? Is kind of the overhang from those gone, and -- ?

We think so. We will be in meetings for the balance of the week to make sure that we're comfortable there. But again, we think we've got them where we want them and operating -- you are never as good as you would like to be, but operating better than we had been, and we're ready to move on.

We just need to be sure not only from an operating standpoint, but from the standpoint of all the back office functions that we are where we need to be there. I would love to see our software a little bit further along the line, but we will deal with that as we go on.

Last question is just about regionally in the US where you're seeing pockets of strength. You said it was a little bit sporadic, and some areas were better than others. Could you give a little more color on that?

What we saw in June was -- it was interesting. Of all places, the Southeast really became very tight on our ability to find outside power. We had some issues in Texas, which is also somewhat unusual. And we saw the normal issues that we've experienced in the past in both the Chicago area and the West Coast -- certain pockets on the West Coast. Overall, we were obviously able to get through it. But it's just -- the something we hadn't experienced for a while.

Thank you very much.

Todd Fowler, KeyBanc Capital Markets.

Good morning. I guess getting back to the Solutions side, with operating expenses here coming in around 9 million for the quarter, about 7.5 million excluding fuel, is there any thought at where that should trend once you kind of cleanup some of the issues related to the acquisition, or maybe how much is in the operating expenses during the quarter related to integration costs? And as you get rid of some of these operating leases basically where that should go?

The quick answer is it should go down.

That's a good answer. Magnitude of how far it should go down?

That's from my latest economics class. You will see us make progress in what we call other category because that's where a lot of acquisition expense went into. You will also see our leases. As Rodney touched on earlier, we have turned in equipment, we will continue to turn in additional equipment. We will bring on some of our own -- owned equipment, which will continue to push down at leased cost.

And then it's a matter of what we call Forward Air discipline, and the ability to get the efficiencies out. That will show up primarily on the labor side. They have made really solid strides there; we just need to make further ones. So it will concentrate in those categories, but the way you make a company operate really good is you improve all categories. And that's what we're after.

Do you think it's $200,000 of additional cost that are in there right now? Or is it something larger than that?

I can tell you specifically, San Antonio cost us about $75,000 to open during the month, which we anticipated. And it was a good move and we think it will be a good short-term and obviously a great long-term move. But whenever you start up, you're going to incur those expenses. So we have $75,000 there, we probably got somewhere around $250,000 additional costs that we hope to see disappear.

That's great. And I guess looking at the purchase transportation costs in the quarter, looks like some favorable trends. Can you talk a little bit about what you're seeing an airport-to-airport side, and with the run rate you're seeing versus transportation costs in airport-to-airport, how sustainable is that going forward? Do you get a sense that that's going to tighten as we get into the third and fourth quarter, or can we see the positive contributions here in the second quarter be sustained through the balance of the year?

Our goal is to sustain it. We don't think we can improve it that much more. Although I didn't think they could get it to where it is today. So hats off to our group, our Logistics group. We think we are in really good position.

What drives that is, number one, our load average. Chris and his team did a good job of making sure we had good load averages out of our -- each of our terminals during the quarter. The second thing that drives that is our ability to balance it. And by that, meaning if we have a load out of Chicago, do we have load going back in? When we have that situation, that allows us to run it with our power, our own owner operators, which is at a significant cost reduction.

We measure that on a weekly basis when we're looking at how many miles they ran, and we want to keep at least 90% of the miles in the owner operator fleet that we have. When that number starts to grow, meaning -- I didn't say that right. When that number shrinks, and the outside power number goes up, and we start running into higher cost situations.

So as we go forward in the year, we're pushing very hard to make sure that number one, we stay -- we keep our load averages up. Number two, we stay in balance as much as possible. And in those situations where we're out of balance, can we balance it through our TLX group by sticking the truckload in there and still keeping it on Forward Air power? So these are the three objectives they're running with. And we think they can at least maintain where they are today. That's a big challenge to them, because those numbers are outstanding.

That was the nice surprise here. And it doesn't sound easy either. I guess next, on fuel, I was hoping maybe for a little bit more color. It seems like fuel is a little bit of larger headwind in the Solutions business. Can you talk a little bit about why fuel is more of a headwind there, and how the surcharge would work in the Solutions business, and do you need to recapture more of your fuel costs? And is it that you need to go back to some customers and talk more about pricing, or fuel surcharges given the increase in fuel?

The fuel surcharge on the Solutions side, and I'm not being evasive, but it is literally all over the board. In some cases we charge on a per-carton, and most of it driven by our shippers. So they each have their own unique way of looking at fuel surcharge, as opposed our airport-to- airport business, where there is a number put out every week now, and that's the number on a percentage basis of the total revenue that the freight bill generates.

On Solutions, it could be that simple. It could be we've got 1000 lb. shipment going from A to B, and you put additional revenue on it like we would the airport-to-airport to cover the fuel surcharge. And then you have carton programs where you put fuel surcharge based on the carton. And we have what we call DSD, which is direct store delivery, which we have a rate per mile fuel surcharge. So -- and there are little variations off of that. So it's literally all over the board.

Our people do a very good job of managing that, and what we try to do -- well, what we do on a weekly basis is we look at how much money we spend on fuel. And then we look at what our fuel spend was -- pardon me, what our fuel surcharge revenue was, and we look at our recovery rate. And so far we've been able to recover in most cases that fuel amount. But it's a struggle because the retailers are feeling pressure. And we're just in there battling trying to make sure we stay right. We don't want to make money on it, we just don't want to lose money on it.

That's helpful. Lastly, can you talk a little bit about the environment right now? I know if I read through the press release and your commentary it's certainly still challenging. Is your sense that -- it's maybe a little bit less challenging than what it was a year ago at this point? Is it still just as challenging? And I know there's moving parts with the acquisitions and with Kitty Hawk, but just your sense for what you're feeling certainly throughout second quarter, maybe into July as well.

My quick answer to that is I don't know. I can tell you what we're anticipating or what we're planning for is we have certain areas of the country that are doing pretty well. And we have other areas of the country that -- they're having more battles, and probably -- it's across the board in those areas where it's not an issue of competitive pressures or anything else. There's just simply not as much business as there was in the past.

What we have found in the history of Forward Air is when that occurs, those areas will recover very quickly. The issue is when will that be? So our goal going into the third and fourth quarter is we anticipate, based off of historical runs, continued growth in the airport-to-airport segment, but each area has its own growth rate. And we have the ability and to adjust our model if necessary to whatever the economic conditions are.

But in all candor, we're very hesitant to say it's going to be great or it's going to be bad, and I continue to go back to what we've said all along is -- we think business is okay. It's not great, it's not what it was three years ago. But it's okay.

Thanks, Bruce, nice quarter.

Edward Wolfe, Wolfe Research.

This is Tim Denoyer in for Ed. I just wanted to check, you said the organic growth net of the acquisitions was 2% to 3% in the second quarter. How is that trending so far in July?

About the same.

Are you still seeing -- you mentioned some tightness in capacity in the Southeast Texas, California, Chicago I think in June. Are you seeing that loosen up in July, and is the tightness or looseness in capacity in July normal for this?

Answer is it did mitigate when we got into July. And it is also very normal for July to be more of a slow month. And as a result we tend to find capacity easier than we do other months.

To ask the sort of -- stripping out the acquisitions question a little different way, could you try to quantify the amount of the 300 basis points of OR deterioration that was attributable to the acquisitions for the lower margins?

We have not done that specifically. We can do that for you if you like, but not as we speak.

I would be interested to see it. How do you think about acquisitions going forward, given you made three in the last year now, relative to share repurchases? Do you think you would be more willing to go back to the share repurchases as you work out some of these integration issues?

Most of the integrations issues, as we touched on earlier, are behind us. We're ready to go again for the right situation. If we are in -- we did most of our stock repurchases when we had over $100 million on the balance sheet and we also had a bunch of private equity firms out there running around paying 10 to 14 times earnings for companies that most of them are now bankrupt or in some type of serious trouble. It's hard to imagine. We really had no choice but to go back and by stock.

And that's a good investment of our money, but a better investment of our money is to grow our company. And when we find the right acquisitions that's exactly what we're going to do with it. A year from now, all of that may change, and the idiots may come back to the acquisition market, so we would be out of it again. We want to make sure that we take advantage of this time.

Are you seeing pretty decent multiples out there these days?

We are.

What was the fuel expense that was broken out? I saw it was about 2.7% of revenue. Was that -- could you explain what that was and why it was up the way it was year-over-year?

That's the first quarter we have broken out fuel because it has become a significant line item. Historically that's been buried in other expense. And the reason is broken out is because of the company-owned tractors and trucks that we have acquired in through the last three acquisitions. So it rolls up below the line as opposed to the fuel that we paid -- fuel surcharge we paid back to our owner operators. That's real fuel and not fuel surcharge.

And then the higher tax rate you mentioned (technical difficulty) earlier, is that -- can you say it again and will that continue?

It will continue. Two reasons are -- we had -- investment -- tax reinvestments on our balance sheet this time last year, those were all gone. And we're in a net debt position so we will not be getting that tax-free interest, and also the tax treatment for share based comp, you don't get the benefit of that. So that's impacted our tax rate as well. And it will continue as is.

So you think about 39%, 40% going forward? And lower insurance expense, did you say was that an annual actuarial review?

We do that two times a year.

Actually one more. What is your outlook for CapEx at this point for the rest of the year? Given the acquisitions, is there much more construction spending?

There is, we don't think CapEx will change from the guidance that we gave earlier this year, which was a total of $26 million. We are evaluating Dallas with increased business and acquisition of Pinch to see if we need -- as long as we're building the building to see if we need to expand that to meet ongoing needs. But 2008 guidance has not changed.

John Barnes, BB&T Capital Markets.

Good morning. Bruce, as you all have worked with your customers on the fuel surcharge, have you seen any impact on your ability to get pure price? Has that become more competitive, more difficult? And given where fuel prices are today, are you willing to give up a little bit on pure price in order to recoup the higher fuel cost?

We really try to keep the two totally separate. We have cost models that show what our costs are to move freight from point A to point B, and we have our fuel model which shows this -- what fuel surcharge should be. When we get into these arguments about -- where -- we just don't give on fuel unless it's something really extraordinary.

And there are a few occasions where you get into some unique situations that in fact the model doesn't work properly on fuel, and we will give on that only because we're wrong, and we should give on it. But otherwise we just don't give a lot there.

Are you -- is any of your business, contractual business, are you capped at all on fuel?

We are not. We do have -- on the truckload side some -- every six-month negotiations or whatever. But that's not a very large piece.

Can you give us an idea of -- since you got back into doing more business with the airlines, can you talk -- walk us through the trendline as to -- I believe you were growing that pretty much off a zero at one point. So can you talk to us about, as a percentage of revenue, how much your exposure to the airline business has increased over the last several quarters?

We went basically from having British Airways and then some smaller airlines to today doing probably between 2% to 3% of our Forward Air revenue associated with airlines.

And what are you comfortable with in terms of letting that grow? Do you think we're past the issues that caused you to really [bid] to pull out of that business, and therefore you're comfortable letting it be a larger piece of your growth going forward? Or are you maybe getting to the point where you're kind of comfortable with where it is on a go forward basis?

It's strictly on a customer by customer basis. Especially if -- some of the international airlines are in wonderful financial shape. We're not concerned with them. Some of the domestics -- it's the same story that you know. We're watching them very closely. We do establish credit lines with them. We do expect them to pay us on time. And when that doesn't happen we do get excited. So we want to be hard-working, fair partners with them, and we want them to equally pay us on time. And we will make credit judgments airline by airline, basically.

Same thing on -- same discussion on your length of haul. Since its peak, can you give us an idea of where your length of haul is, has fallen to, and where do you think that begins to kind of -- to stabilize, and where you don't see the 5% to 6% reduction in yield on a mix change basis where you would begin to see may be that flatten out a little bit or even begin to increase a little bit?

I think we're there now. Most of the regional traffic that we put in place has occurred. I'm sure -- I hope there will be some growth there in the future. But that growth will be matched up with regular growth, if you will, of the longer haul business. We think it's stabilized now.

I saw a blurb the other day that I think another one of the big heavy -- the aircraft owning airfreight companies, let me spit that out, has filed for bankruptcy again. There has been so much capacity exiting the traditional airfreight market, domestic airfreight market. Do you think you're just about at the end of the competitors exiting the marketplace and some of the irrational behavior that we've seen from time to time?

Or -- and the economy begins to pick up a little bit of momentum that you're down to a core group of service providers that -- this is kind of the necessary capacity to serve what's out there, or do you think there is another stair step function in capacity to exit this particular market, the airport-to-airport market?

Wow. You know, through our almost nineteen years now, it seems like we go every -- we go through two to three year cycles where there is a new Forward Air, and there is a new whatever. And they last a year, a year and half or whatever and they go bankrupt. It's just an endless cycle. So I don't see anything changing.

There are a lot of these airfreight geniuses out there that -- they could start up a truck line like Forward Air and just over night they can be Forward Air. So I think that will go on as long as there are idiots in the world, and there are idiots in the world.

My new favorite saying is you can't cure stupid. So Bruce, nice quarter. Thank you for your time.

[Andrew Board, Finmore Asset Management].

Good morning guys I want to ask if all the acquisition it looks like you have intangibles that are to be amortized and (inaudible) broken out as an expense. Just wanted get a feel for how big that might be and what not?

Can we get that do you? We have it, we just don't have it in front of us.

That would be fine.

Ken Hoexter, Merrill Lynch.

Good morning. Just want to talk to you about a couple things. On the Solutions side, you got asked a bunch of questions about potential for further acquisitions if you're ready or not. Are there other solutions providers that kind of fit within the geographic area that you're -- that you don't have coverage in yet?

Yes.

Are there many options, or are there a few providers in those regions?

That really depends on the exact geographic area. In some areas there are two or three, in others there are just one.

So there are opportunities to do things in scale as opposed to doing it piecemeal.

Right.

I take it you don't want to give specific names. There was a great increase in owner operators in -- sorry, in the percentage of traffic carried by the owner operators, do you expect that trend to continue?

We hope it does

And move away from brokerage?

Again, we want to minimize our use of brokerage as much as we possibly can, because it does drive a big number to the bottom.

You're into the what, the upper 80s as far as a percent move by the owner operators?

If you take our -- we look every Monday morning at the miles we ran in our system. Their goal is to keep the brokerage or the outside carrier miles to 10% or less, meaning that our owner operators are running at least 90% of the miles. And we know if we do that actually can drive it even lower, that our profitability continues to improve. So that has been our goal and they have done a really good job with that.

Let me come back to Solutions for a quick second. Purchase transportation was up about 18%. I know last quarter you said it was a seasonal business, and that retailers are obviously -- I think you said first quarter was the worst for the retailers. So you expected that to be the worst.

I'm just wondering, now that we've had four full quarters of USA Carriers in the results, can you kind of walk-through maybe your view on the seasonality on the Solutions side, and why would PT as a percent of expense be higher in the second quarter relative to what you thought in the first? Is it strictly fuel, or is there more seasonality to the expense side there is well?

As far as PT and Solutions is concerned, that's because we are running some of the linehaul for our pool customer. So we have, instead of just doing the distribution portion of the movement, we're actually doing from the distribution center to our facility, and so that drives -- it drives up revenue and drives up the PT. Overall, that is a good thing, not a bad thing.

Is that something you were not doing before?

We were doing very limited amounts of it, mainly because we were new to the business.

So the business itself is changing as you have acquired it, you're doing more of the delivery and linehaul.

We're trying to, yes.

How much have you changed? How much further is there to go? Should we continue to see PT go up as you continue to transition for the next few quarters?

It really depends on our success with the customers. And our success in giving the right -- I want to make this sound -- I don't want to make this sound arrogant. There is some of that business we do not want because we do not have a need for it. There are other parts of that business that we really do want. The reason we want it is typically geographically it's located in an area of the country that we want to move the freight back and help reposition our equipment.

So there is both good and there is less good traffic there. So we will hopefully see that business grow, but it's not going to grow significantly. Our real push here is to build the distribution business side of it.

Makes sense. Can you say how much of it you converted over that you want to convert?

Right now what you're seeing -- or two things. One is a movement between the terminals. An example is we have the ability for customer A to service all of Texas, but they can only move their linehaul into Dallas. So what happens is they move their linehaul into Dallas, we break it, we put it on Forward Air, airport-to-airport, and then move it to Houston and San Antonio. That shows up as PT. And then there is additional cost to get it to the store. That is business that we really want and we want to build on.

But if somebody has truckloads where they have been able to negotiate really good rates, just pick an area -- say out of Chicago, they can go from Chicago to Miami for $1.20, we're not going to touch that. We're not interested in handling that.

Okay. Great, thank you very much for the time.

Matthew Troy, Citi Investment Research.

Thank you. I was wondering, did you guys -- I jumped on late so I apologize if this has been answered. Did you see any benefit or detriment to your service revenue in the quarter as a result of the flooding in the Midwest?

Our Moline terminal and our Iowa terminal, Cedar Rapids and Burlington, they were affected. For the most part they were able to operate -- I would not call it normal, but they were able to get through it. The big impact that you feel -- and it's not a huge impact to us because that region is not a huge part of our revenue picture -- was the shutdown of various businesses in the area that you had no need for transportation because they weren't open and operating. We now see them operating normally.

In terms of customer behavior, just wondering obviously the trade down from air to ground is a multiyear trend I think you alluded in your comments earlier. But are you see any change in behavior from customers taking a harder look at their supply chain and the current economic downturn, and asking you to do more with either the services you provide or the assets that you provide to them? Any change of customer behavior there that's having implications for how you either A manage the network, or B think about extending and expanding your service offering over the next year or two?

I think the big thing, and we had anticipated this, is there continues to be growth on the short haul side, people moving -- the shorter haul type of traffic more and more, we think that will expand. We think that area has bigger growth opportunities than the longer haul type of traffic.

I think you may have mentioned that on the last call. In terms of that growth opportunity, what kind of capital or what kind of investment needs to be made to capture it, or the lion's share you can rein in with your existing infrastructure?

Exactly, the last part of your statement is correct. We can rein it in.

Thank you for joining us today for Forward Air Corporation's second quarter 2008 earnings conference call. Please remember the webcast will be available shortly after this call on the IR section of Forward Air's website. You may now disconnect, and have a great day.